The courier, express, and postal industry is the largest segment of the transportation marketplace worldwide. This blog will provide a personal perspective on the challenges faced by firms in the industry as they serve an increasingly competitive market.

Friday, March 11, 2011

Over the past several days, there has been some debate about what the 30,000 reduction in Postal Service employees really mean. Both postalnews.com and the Washington Post have reported that 30,000 represents a combination of regular attrition and the reduction in 7,500 management positions that will be announced on March 25.

So how much will the reduction of 30,000 employees save the Postal Service? The Postal Service's average monthly compensation cost is $6339.27 per employee. (This works out to a salary of around $54,000 per year or $4,500 per month with the rest being the cost of employee benefits and employment taxes.) If one assumes that retiring employees earn 15% above average then the savings per month per retiring employee is $7,290.16 per month. Attrition then reduces the Postal Service's compensation by around $6.736 billion this year.

The March 25th announcement will just start the process of eliminating positions, so it is likely that the Postal Service will not see the full impact of the announcement until the end of June. So the cuts in positions will cut the payroll for only three months this fiscal year. The savings, using the same assumptions will be $306 million.

Combined the total savings is $7.042 billion. However, even with this reduction in compensation the best the Postal Service can do is cover its operating expenses. These cuts generate an insufficient profits and cash to cover the Postal Service's capital needs and other investments necessary to maintain universal service and transition to a leaner more efficient operation, let alone pay one dollar of the disputed retiree payments.

So let's ask a hypothetical question. What is the total number of employees that the Postal Service can employ and still be a self-sufficient enterprise? This question needs to be asked both with and without the retiree payments and with both current compensation levels and reduced compensation levels that would come through retirement incentives and the introduction of a two tiered wage structure.

Assumptions

The Postal Service does not pay any of the disputed retiree obligations.

The average monthly compensation is $6339.27 (including all benefits and employment taxes)

The Postal Service's revenue in 2011 will be near the plan level of $67.1 billion.

The Postal Service needs an operating margin of 12% to be self-sufficient.

Total costs need to be $59.1 billion.

Cost reduction required above current plan $8 billion.

90% of the savings come from reduction in employees.

Result

If one assumes that salaries remain at current levels, the Postal Service must reduce its workforce by 94,648 employees to be self-sufficient. That is close to 1/6 of the current workforce. The number would be lower if the Postal Service is able to negotiate a two-tiered wage agreement with its unions but will still be a shockingly large number.

This little exercise should give stakeholders pause as it is clear that many things have to be put on the table to cut costs that Congress and other stakeholders are resistant to change. These include:

Cut an additional 20 to 40 district offices and 1 to 2 Area offices - Cuts in management will like need to be at least twice what is announce on March 25. The Postal Service cannot be too agressive in cutting out a layer of management.

Acceleration of plant consolidation - Members of Congress may object to the consolidations but they will proceed regardless of their efforts. Future consolidations after those that will occur this year and next will likely start to require capital expenditures and the cash to finance them.

Modernization of the retail infrastructure - Mail services need to be accessible but the current method may be unaffordable. A new model needs to be put into place quickly.

Restructuring of rural mail services - The Postal Service needs to look at the Australian model for providing service in the most rural parts of the United States. It would require looking at rural service as a profit center that includes revenue and costs associated with retail and delivery and a major expansion of services that they are legally allowed to offer in a rural retail facility. It may require doing what Australia Post has done and franchising to a local company to provide both the retail and delivery function.

Changes in civil service employment law - Senator Susan Collins has already introduced legislation to change rules for workers compensation but more changes are needed in employment law as it affects the Postal Service. If the Postal Service is going to implement the major operating changes required to reduce the number of employees to levels that the business can support, it needs streamlined rules to implement reductions in force and early retirement incentives. Current rules were not designed to handle the rapid reductions in employment counts that the Postal Service will need to be self-sufficient. Without these changes, reducing the number of employees through any method other than attrition remains a difficult and expensive option to implement.

Five-day delivery - A switch to 5-day delivery is unlikely in the next few years. However, unless the Postal Service can find a way to reduce its costs in other ways five-day delivery will likely need to be introduced by 2020 even if savings are well less than one billion dollars.

Rate increases - Rate increases above CPI have to be the last option but rate increases are probable even if the previous six changes are implemented. In particular, single-piece First Class mail rates need to rise to cover the costs of reducing the number of employees to reflect the rapid decline in these employees and the future liabilities for their retiree expenses. Rates for the Postal Service's largest mailers will also likely rise with some loss in volume

As the last oversight hearing showed, the Federal government is a creditor that holds a note (legislated retiree health-care obligation payments) that the Postal Service has stated it will not pay. In the private sector, creditors faced with situation would be forced to put the enterprise that will default on its obligations into bankruptcy to see how it can be repaid either through liquidation or restructuring. As the equivalent of the creditor committee, Congress needs to quickly figure out if there is a plan that can put the Postal Service on the road to self-sufficiency that would allow it to pay some or all of the retiree-obligations that are currently baked into the Federal budget.

14 comments:

Anonymous
said...

Donahoe added, "Even during two of the worst years of the recession, 2007 and 2008, had it not been for the prefunding requirement, the Postal Service would have realized a profit of $3.3 and $2.8 billion respectively. The effect of RHB prefunding is profound."

Why cut service when the fix is in the prefunding Mr.Donahoe?You did say we would of made 6.1 billion dollars in 2 years,As Charlie would say thats winning sir

UPS needs about 300,000 people to make 5 billion deliveries a year. The USPS has 600,000 people and makes about 150 billion deliveries a year. Certainly USPS is overstaffed for current volume levels, but reducing employees to the level proposed in this article may not be possible without service cuts too.

..With all the bad publicity I have heard about how bad we are doing financially, I was very surprised when I found out that the former post master general retired with a 5.5 million dollar settlement in his retirement. I thought to myself, and they dont even want to give most of the FERS employees a decent retirement.What they offered me the last go round was shameful. Who can live on $975.00 a month?? Tell me??? Then I find out more crap when talking about managers. I found out that all these years the head honchos have never even paid for their health benefits. Then they cry big time about how broke they are, and how much money we pee ons (who bust their ass doing the work of 3 people now) make. About how we get automatic pay increases, and its breaking the bank!!!!! Blah blah blah. I really believe that with whats going on right now they are just trying to work us so hard that we all get hurt.....therfore u can count on a walk out by your manager and the reassessment team. Maybe they are hoping we will just reach a point where we say enough is enough......g'bye and hope I never see u again!!!! Personally with only 23 yrs in and at 55 of age...I am ready to do that. I am a clerk and believe me its getting to be just too much now. They keep giving us more and more work to do. I feel like we should be paid more than we get. I cant even remember the last raise I got. Can you? Do I sound bitter??? I feel it because they dont appreciate us, and when the older ones go....there goes the real service. They want to replace us with casuals??? They dont know anything like zips, or what the postal might be.....so much gets delivered without it now. Wonder why? Good employees will become a thing of the past. Freedom, I can taste it.

It is a given that eliminating management levels will save money. However, hiring outside college educated Business grads would help our business. Most Management are Aff. action and could not compose a paragraph to save their lives. Also, as the PMG said the average postal worker is 54. We are slower and tired as hell. You could incent a retirement and hire cheaper labor. Younger labor!But what am I saying? This is good business moves, and the USPS are clueless concerning business.

anonymous, If anyone out there works for the postmaster and poom from Pheonixville, pa. i pity you he is a tyrant and should be fired.his managing tatics our outlandish.He harasses carriers endlessly and knows just how far he can go without getting in trouble, He's a numbers guy and upper managment loves that.He's also making two salerys thats right,and he's also absorbing a small area office and his will go higher level.Do you know any carries getting extra pay for doing extra or other jobs we perform daily, no we go out after our routes are finished all the time.Most time forced. It's time for this to stop we need for people like him to be downsized.This so called poom piece of oversized shit, lives in 500,000.00 condo on a privite golf course I can't aford to play. this is par for the course for the post office.hey DONAHOE wake up fire your buddies.

I have added the word monthly to the compensation figure to make it clearer.

What this post really shows is how far the Postal Service really is from self sufficiency. It may be possible to cut as many jobs as the article suggest are need but it is possible that service requires fewr cuts that puts pressure on generating revenue or outside investment capital.

First realize the a majority of the 30K will be from retirees that wont be replaced.

Anyone that truely thinks the USPS can get rid of 90K+ and still get your mail to you before dark has no idea on how things work. Most carrier stations are working with the bare minimum now.....unless you want everyone working 10-12 hour days 6 days a week...and if that happens watch the sick, lame and lazy #'s go way up....

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Blog Author

Alan Robinson is the President of the Direct Communications Group and an associate of Analytic Business Services (AnaBus). He has over twenty years experience helping firms and government officials deal with the regulatory, policy, marketing, and management issues associated with changes in competition within transportation, parcel delivery and postal markets.
He can be reached at alan.robinson@directcomgroup.com